The Plight of the Small Business Sector

Regime Uncertainty Continues to Pressure Small Business Confidence

Over the entire so-called 'recovery' and in spite of corporate profits reaching all time highs relative to total economic output, small business confidence in the US has failed to rise to any appreciable extent.

We believe that this reflects 'regime uncertainty', due to the administration's imposition of new regulations and business costs, with the new health care legislation a prominent example. Also, the constant interventions by the central bank contribute to the regime uncertainty backdrop. Large corporations are far better able to deal with this onslaught of regulations than small ones, which simply cannot bear the costs. One recent data point we are aware of is that under the Obama administration, the Federal Register grew to over 81,000 pages in 2010, or by 19% in a single year. The Small Business Administration estimates the cost of compliance with regulations to amount to approximately $1.7 trillion annually (as of 2010), which incidentally exceeds annual corporate profits by a sizable margin.

For an excellent summary of the costs of the regulatory state, we recommend looking at the '10,000 Commandments' report published by the Competitive Enterprise Institute. Here is the 2012 edition (pdf).

Generally speaking, the problem is that no-one knows what the interventionists will think of next. That weighs heavily on investment and hiring decisions, as entrepreneurs refuse to take undue risks in the face of such uncertainties. The huge deficit spending spree of recent years contributes to this as well, via the so-called 'Ricardo effect' – people know that today's deficit spending is nothing but deferred higher taxation. They were recently proved right when the administration raised various taxes in the year-end 'fiscal cliff' compromise.

NFIB chief economist Bill Dunkelberg comments on the April report as follows:

“After another false start, small business confidence has sputtered and stalled again. For the sector that produces half the private GDP and employs half the private sector workforce -— the fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy. Virtually no owners think the current period is a good time to expand, because they simply don’t know what the future holds. So why invest?

And with the lack of any sustainable fiscal policy or a federal budget, no one’s banking that Washington will be at forefront of any meaningful change. Overall, it appears that there will be little growth coming from the small business half of the economy; as the world economy slows, even big business may suffer.”

(emphasis added)

Evidently, Mr. Dunkelberg knows exactly what the problem is. The complete April report can be viewed here (pdf). Since small businesses account for half of all private sector employment, this is very bad news for the employment situation. Hence, the Fed is set to continue pumping, further exacerbating the ongoing destruction of wealth-generating activities.